'Costliest year in history': Natural disasters take $767m bite out of QBE profits

QBE Group has slashed profit expectations for this financial year, after a series of hurricanes and other disasters left the global insurance industry facing its most expensive year on record.

The insurer on Tuesday said it was lifting its allowance for large disaster claims for the year to $US1.75 billion ($2.24 billion) , which will take a $US600 million ($767.42 million) pre-tax bite out of its pre-tax earnings.

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It expects to make no profit or a loss from its underwriting over the year, after sharp rise in its costs from a run of disasters in the US where it makes a large share of earnings.

QBE said its combined operating ratio – losses as a share of premium revenue – would blow out to 100 to 102 per cent, indicating no or negative profits from underwriting.

«Given catastrophe losses to date, 2017 will likely prove to be the costliest year in the history of the global insurance industry,» QBE said.

«Cyclone Debbie in Australia earlier this year, Hurricanes Harvey, Irma and Maria which impacted the Gulf of Mexico, the Caribbean and Florida as well as the earthquakes in Mexico have all impacted QBE’s businesses.»

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Although the whole US insurance market has been exposed to recent hurricanes, the downgrade may come as a further blow to investor confidence in QBE – already battered in recent months after a damaging downgrade to its emerging markets business and soft profit guidance in August.

«They’ve got issues with emerging markets, and now they’ve got this as well,» Bell Potter analyst TS Lim said. «It’s going to be tough for them to get out of the dog house.»

Shaw Stockbroking analyst David Spotswood estimated the company was now on track to make a full-year profit of about $US160 million – down from $US844 million last year.

«They are going into losses in the second half,» Mr Spotswood said. «The issue will be is it a one-off for the P&L [profit and loss] and the balance sheet for this year.»

The downgrade has occurred before the next chief executive, Pat Regan from outgoing boss John Neal at the start of 2018. Mr Spotswood, who has a «sell» rating on the stock, said a «re-basing» was «odds on» after Mr Regen picked up the reins, as is often the case when a new chief executive starts.

Although some in the market had anticipated hurricane costs, there had been uncertainty in recent weeks over whether QBE would exceed its budget because of the US hurricane disasters..

The size of the claims to hit QBE from recent disasters has burst through the insurer’s budget for large individual risk and catastrophe claims of $1.15 billion, and the extra $900 million it has in reinsurance cover.

«Our thoughts are with those affected by these devastating events including our customers, business partners and employees,» Mr Neal said.

While the hit to profits is substantial, there is also an expectation that insurance premiums could rise after the disasters, after they were depressed in recent years by low claim numbers and ultra low global interest rates.

«While it is too early to speculate how much reinsurance and primary insurance pricing will rise as a result of recent catastrophe experience, QBE is well placed to benefit from price rises with much of our reinsurance programs already purchased for 2018.»